Fiscal And Monetary Policy Flashcards
Fiscal policy definition
Refers to the governments tax and spending plans for the years ahead
What is the main instrument of fiscal policy
Taxation
What does the government normally operate?
A fiscal deficit
Fiscal defecit meaning
The government spends more than its tax income
Monetary policy definition
The use of interest rates and changes to the money supply to achieve relevant economic objectives
Fiscal policy main taxes
Income tax
Corporation tax
VAT
Fiscal policy what taxes are spent on
Health
Education
Social security
Give an example of a fiscal deficit
Taxes (in) = £776 billion
Spending (out) = £813 billion
Budget deficit of £37 billion
Outline bank of england (monetary)
Changes interest rates of money and supply
Aim to influence spending in the economy.
Outline recession (monetary)
Cutting interest rates and create more money.
Aim to pstimulate more consumption and spending due to cheaper cost of borrowing
Outline benefits to business (monetary)
Increased demand and consumption increase sales and therefore revenue
Highly geared businesses will benefit as lower cost of borrowing reduces monthly payments.
Who controls monetary policy?
The bank of england.
What is the main objective of monetary policy
To keep inflation low and stable but also to support stability of economic growth
Benefits to more open trade
Can create opportunities e.g. lower costs due to new overseas suppliers.
Can allow firm to expand into new regions and markets by exporting.
Define protectionism
Any attempt by a country to impose restrictions on trade of goods and services.
Methods of protectionism
Tarrifs (taxes on imported goods or an increase price of these goods)
Quotas (annual physical limits on quantity of goods that can be imported)
Non direct such as legal standards or regulations that can prevent entry or lead to litigation
What happens once a quota has been reached
Consumers will have no choice but to buy domestically produced substitutes
What do high tariffs aim to do
Divert demand away from foreign imports to domestically produced alternatives
Protectionism is the opposite of
Open trade
Criticisms of open trade
Smaller businesses experience competition from foreign businesses in domestic market
Criticism for encouraging offshoring as it is detrimental to the domestic job market
What is a fiscal surplus
When revenue is greater than expenditure
What is an expansion fiscal policy?
Cut taxation and/or increase expenditure on items such as health, education or social services etc.
What is a contractors fiscal policy?
Reducing governemnt expenditure or increasing taxation, or both simultaneously.
Reduce government budget deficit of increased surplus.
Two effects of government taxation and expenditure policies.
Direct and indirect taxes.
Outline direct taxes
Take a larger amount from individuals earning high salaries and companies with big profit margins.
What is affected by direct taxes
Implications for each business varies on the product.
Luxury goods significantly effected
Basic food stuffs not as effected
Outline indirect taxes
Vat and other taxes are indirect
Changes can have rapid, hard to predict effects on the economy.
What is affected by an increase in vat?
Cut consumer spending, reduce demand and lower economic activity. The extent of the fall will depend on the PED of the goods.
Essentials will not fall, DIY products may
